These 4 Measures Indicate That Overstock.com (NASDAQ:OSTK) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Overstock.com, Inc. (NASDAQ:OSTK) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Overstock.com

What Is Overstock.com's Net Debt?

The image below, which you can click on for greater detail, shows that Overstock.com had debt of US$40.5m at the end of March 2022, a reduction from US$43.7m over a year. But on the other hand it also has US$493.3m in cash, leading to a US$452.8m net cash position.

A Look At Overstock.com's Liabilities

Zooming in on the latest balance sheet data, we can see that Overstock.com had liabilities of US$284.6m due within 12 months and liabilities of US$47.3m due beyond that. On the other hand, it had cash of US$493.3m and US$23.7m worth of receivables due within a year. So it can boast US$185.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Overstock.com could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Overstock.com boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Overstock.com's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Overstock.com can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Overstock.com may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Overstock.com actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Overstock.com has US$452.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$38m, being 131% of its EBIT. So we are not troubled with Overstock.com's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Overstock.com that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.